Germany’s calm in the face of Europe’s debt crisis

By Ezra KleinDecember 5, 2011

Berlin

It is no exaggeration to say that this week could be remembered as the week that Europe either pulled back from the cliff or careened off of it altogether.

On Sunday night, Mario Monti, the new prime minister of Italy, received his cabinet’s approval for a tough package of reforms. On Monday, Angela Merkel and Nicolas Sarkozy, the leaders of Germany and France, respectively, announced an agreement on reforms that would lead to a tighter fiscal union — a plan that, if it’s well received by other nations in the euro zone, could persuade Germany and the European Central Bank to mount a rescue of the euro zone. Later in the day, Standard & Poor’s informed Austria, Finland, France, Germany, Luxembourg and the Netherlands that they were considering downgrading their credit.

I’m watching this unfold from Germany. The topic of my trip was supposed to be the reforms Germany made to its manufacturing sector over the past decade. Because of the timing, the future of the euro has dominated. In more than a dozen discussions with policymakers, I’ve noticed that Germans just do not talk about this crisis the way anyone else does. Some of the differences:

• They seem serenely confident that it will all work out, and this will end with a stronger, more united Europe. There’s less panic than you would expect. Less panic, certainly, than there is among American economists and policymakers.

• History matters here. A lot. In America, we tend to think of the euro zone as an economic entity. In Germany, it’s also spoken of as an ideological entity — a political project intended as an answer to centuries of wars and decades of uneasy peace. Giving up on it thus risks much more than mere economic chaos. It risks everything that Europe in general, and the Germans in particular, have been working toward since the end of World War II.

• In part because history matters, France matters. The Germans are very sensitive to accusations that they’re attempting to dominate Europe through economic means. To calm that fear, they have been very careful to stay in lockstep with France. That’s likely to continue.

• While Germans worry about the appearance of German power, they also worry about the diminution of European power. Many see the euro zone as a political project that assures Europe a significant voice in international affairs going forward. If it dissolves, they worry that they’ll be drowned out in a conversation that increasingly takes place between the United States and China, with India and Brazil vying with Europe to be heard.

• But the Germans don’t want to be saps, either. The question here isn’t so much whether the troubled countries on the European periphery can pass plans to reduce their deficits and deregulate their labor markets. It’s whether they can stick to them. That’s why the Germans are intent on solving this through a new treaty that empowers some entity — perhaps the European Commission — to veto budgets that break the treaty’s rules and penalize countries that run large deficits. Imagine you were a resident of Ireland: Would you want to hand control of your budgets to bureaucrats in Brussels? Can you imagine anything like that passing in America?

• The German embrace of austerity raises an obvious question: If nations in Southern Europe are to cut and tax, how will they grow? The German answer, put simply, is, “like we did.” Ten years ago, the Germans are quick to note, unemployment in Germany was 10 percent and structural deficits were large. Germany was called “the sick man of Europe.” Germans attribute their subsequent success to painful reforms they made to their unemployment insurance system, their health-care sector and other pieces of their social safety net. Many figure that if they could do it, so, too, can Southern Europe. In truth, it’s probably not that easy — Southern Europe doesn’t have the industrial strength of Germany, and no longer even controls its currency levels — but it makes sense to the man on the street.

• Germans also thinks that the markets have somewhat exaggerated Europe’s problems. Greece is a basketcase. But Italy is not. Nor is Spain, Portugal or Ireland. These countries have too much debt, and in some cases, too many shackles on their labor markets, but they are being unfairly grouped in with Greece, when their problems are much more manageable. There is, incidentally, quite a bit of truth to this. Ireland was considered a model economy through much of the Aughts. Spain and Italy had declining debt-to-GDP ratios until the housing bubble popped and the world economy went into a tailspin.

• Germany also thinks the market, and Americans, are too focused on the short-term problems of the euro zone. They see this crisis as an opportunity to make reforms that will fix the long-term problems of the euro zone — mainly the lack of budget sanctions. In that way Germany is treating this crisis much as the Republicans treated our debt-ceiling crisis — not as both parties treated our financial crisis. They see it as an opportunity to secure important policy concessions rather than an emergency to be solved at all costs.

• Germany didn’t have a housing bubble. Its unemployment rate is below 7 percent and falling. Deficits are going down, too. As such, I’m told that ordinary Germans, though concerned about the European crisis, are not gripped by the sense of panicked urgency you might expect if you were viewing this from afar. It’s just not affecting their everyday lives yet, and they mostly assume their leaders will work something out.

• But Germany recognizes that it has gained from its membership in the euro zone. In particular, the currency union has been like rocket fuel for Germany’s exports. Germany has a strong economy, and if it had its own currency, it would be a strong currency, and its exports would be expensive. But because it shares a currency with weak economies such as Italy and Greece, its currency is cheaper and so, too, are its exports. By the same token, the weak economies in Southern Europe have been harmed by sharing a currency with Germany, as their exports are more expensive. So Germans recognize they have something to protect here.

All that said, it remains true that the situation is precarious, and neither Germany nor the European Central Bank have committed themselves to the policies necessary to resolve it. So I don’t share the serenity of my hosts. But I’d sure like to.